What is an adjustable-rate mortgage
on a New Jersey home?

An adjustable-rate mortgage, or ARM, is a home loan whose interest rate can go up or down. With a fixed-rate mortgage, the rate is set when you take out the loan and does not change. Many ARMs start at a lower rate than fixed-rate loans, and that starting rate may stay the same for months, one year or a few years.

After that starting period, the rate changes at set intervals, and the monthly payment is likely to go up. The new rate is based on an index, a broader measure of interest rates, plus a margin, a set number of percentage points the lender adds. Some ARMs cap how high the rate can go at each change or over the life of the loan, and the caps can differ between the first change and later ones.

For example, say a buyer in Camden County is offered a fixed-rate loan and an ARM with a lower starting rate. Before choosing, the buyer has the lender show how high the payment could go at each change and whether it would still be affordable at the highest rate the loan allows. The Consumer Financial Protection Bureau cautions buyers not to assume they can sell or refinance before the rate changes.

Questions about rates, caps and payments go to your lender, who can show you how each loan adjusts. Your agent can help you keep track of the dates in your contract, including closing, while your lender works on the loan.